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When Crocs, Inc. made its stock market debut at
$21 a share in 2006 – just four years after it began selling
the colorful foam clogs – skeptics figured it was only a
matter of time before the company stumbled. True, the
comfortable slip-ons were widely embraced by everyone from
parents of preschoolers to medical professionals. But at some
point, they said, the fad would go down in flames.

Despite the naysayers and the knockoffs, sales continued to grow through the
following year, peaking at $847 million in 2007.

Just a year later, the recession hit Crocs hard. "Our business model was that retailers didn’t have to pre-book their
product,” says Crocs chief executive officer John McCarvel,
who was heading up Asian operations for the Niwot, Colo.-based
company at the time. Instead, Crocs based production on
forecasts. When sales dipped, the young company was not only
left holding a surplus of product, it didn’t have a good grasp
of how much inventory its retailers had.

"All of a sudden 2008 hits and not only are retailers not taking
new products, they’re cutting back inventory and the economy is
slowing down at a very rapid pace," he says. In 2009, revenue
plummeted to $646 million and the stock dipped to $1 a share.

Despite its near-death experience, Crocs lives on today. It’s now
a billion-dollar company with a new
spring in its step. That October, shares in CROX climbed
to $75.

The company has expanded its product line to include more than
300 designs in the $25 to $60 price range, from flats and wedges
to furry boots and golf shoes. Today, clogs account for less than
half of all sales. It’s improved its supply-chain management and
revamped its retail strategy; direct-to-consumer sales account
for 43% of its business. At the same time, it’s continued to
expand globally, with U.S. market now representing less than a
third of sales.

From the outside, the transformation appears dramatic. In
reality, it was years in the making, says McCarvel, who was named
CEO in 2010.

"From the beginning we knew that having an iconic clog was a true
blessing, but we also knew we had to innovate," he says. In 2006,
the company bought a small operation in Italy in order to up its
fashion game; the group focuses on product design and material
development. While diversification is a priority, the company
incorporates its trademarked Croslite resin material, which is
soft, lightweight and odor-resistant, into all of its designs.
"You can do a lot of things with it," says McCarvel. Still, the
company was initially so focused on keeping up with demand for
its ubiquitous clogs, he says, it didn’t innovate as quickly as
it probably should have.

Prior to the recession, the company relied primarily on retailers
to sell its shoes and let the product get over distributed. It
was everywhere from Nordstrom to Hallmark stores. Today, Crocs
works with a select group of mid-tier shoe retailers, including
DSW and Famous Footwear, and sells through its own retail outlets
and ecommerce site. The approach helps Crocs control inventory to
better prevent surpluses.

The Lesson Learned

Steve Moore, a partner with Los Angeles private equity
firm Brentwood Associates, counts himself
among Crocs' early skeptics. "Given how fast it was growing
on a single look, you could see the boom and bust," says
Moore, whose firm specializes in buying consumer companies
with strong brand loyalty.

Now, he says, "they've definitely proved us wrong." He says
that Crocs has done an impressive job growing beyond their core
product while not straying too far from what made them
successful in the first place.

Entrepreneurs need to "always be thinking about what's next,"
he says, but there's a fine line between diversification and
dilution. By all means explore new products or distribution
channels, he says "but know when it's time to cut bait if an
idea isn't panning out."

While the Crocs brand suffered during the recession, much of this
was contained in the U.S. market. "Business in Asia never slowed
down and Europe went along at good pace," says McCarvel. "But our
U.S. business was so large relative to the rest of the world."
Now, he adds, "we have more balance globally."

Crocs isn’t the only consumer company to see these kinds of ups
and downs, and growing pains. "A lot of brands that have emerged
over the last years that went from nothing to mainstays have gone
through that same dynamic," says McCarvel.

For entrepreneurs running these overnight sensations, however,
it’s a tough balance between getting all the benefits of that
growth, including brand recognition and getting in with value
retailers, while taking steps to make sure it’s sustainable over
the long run.

"When you see an opportunity in front of you, you want to
maximize your position," says McCarvel. "Did it overextend us?
Maybe in certain aspects it did. But some of those things were
eventually to our benefit."